Pyramid Theory I, Version 3

by Frank Li

On August 19, 2011, I published Politics & Economics: Pyramid Theory I (version 1). It has received close to 6,000 page views so far. In late 2012, I revised it (version 2) for inclusion in my first book “Saving America, Chinese Style”. This is version 3, with applications to three recent hot topics:

1. Middle-out economics

2. Income inequality

3. The minimum wage.

First of all, what is America?

1. What is America?

Most Americans are programmed to believe that America, as a country, has two cornerstones: capitalism and democracy, as illustrated below.

Let’s talk about them briefly.

1.1 Capitalism

Capitalism is about “making money” (or “profits”), nothing else such as “job creation” (which goes against efficiency) or “Made in the USA” (which goes against capitalism that is global by definition). The very essence of capitalism is “me first” and self-reliance: If we all take care of ourselves and our families, we, as a nation, will be fine. I firmly believe this is the best system available on earth, and will remain so, as long as human nature prevails.

1.2 Democracy

Democracy is all about garnering more votes. In order to obtain more votes, our politicians pretend to be “you first” and make up such socialist schemes as “job creation” and “Made in the USA”, totally ignoring or even contradicting capitalism, especially the self-reliance part. Worse yet, they are willing to win your votes at any cost, even if it means destroying America by emptying her public treasury and borrowing way beyond her means! As a result, the “land of opportunity” is now filled with entitlements, to such an extreme now that America, as a country, is heading toward bankruptcy.

So democracy has now usurped capitalism. What to do?

2. Chairman Mao and Richard Nixon

Here is a rumored dialog between Chairman Mao and Richard Nixon in 1972:

1. Mao:

   Aren’t you worried about a revolution, as guns are so widely available over there?

2. Nixon:

   No! Revolutions are not caused by guns, but by the smart people at the bottom. The American system allows the smart people to move up. So there will be no revolution in America.

Nixon was right! America, as the “land of opportunity”, has been a beacon to attract many people to come to America and to allow the best in America to make it.

3. Pyramid Theory I

Everything substantive in our society is pyramidal, with the “winners” sitting on the top and the majority filling in the middle and bottom. Three examples:

1. Wealth: Bill Gates and Warren Buffett are on the pinnacle. The rest of us fill in the middle and bottom.

2. Jobs: There are always more low-pay jobs than high-pay jobs (relatively). If you are good, get a high-pay one!

3. Business: There are always more workers than owners. If you are really good, be an owner!

The pyramidal shape not only follows physics (e.g. gravity), but also is the result of our free enterprise system at its best: You can make it if you work hard and if you are good (and lucky), even all the way to the 1% club! I am a modern-day example of an American dream come true (My American Dream Has Come True).

However, no matter how much our society advances (e.g. computers and the Internet), there are always the needs of having garbage collected and lawns mowed. In other words, while we are the best on earth to give anybody and everybody opportunities to move up (i.e. success), the majority of us will end up in the middle or bottom, as it should be. But politics changes that …

4. Politics

American politics is all about garnering more votes. Because of the lack of term limits, most, if not all, of the politicians work for one purpose only: getting re-elected ad nauseam. So they will do anything and everything to win your votes, including creating various socialist schemes in defiance of “Pyramid Theory I”. Three examples:

1. Home ownership: If you want a bigger and better home than you can actually afford, no problem – we will have Fannie Mae or Freddie Mac help you out. The inherent flaws of easy credit caused a severe financial crisis in 2008 that nearly destroyed the U.S. economy!

2. Job creation: We are willing to spend on such wasteful things as a bridge to nowhere and Marine One, all in the name of job creation (or preservation), so that some of us can pretend to be working while the government can pretend to be paying us, mostly with borrowed money or by taking from others.

3. Made in the USA: Just compare GM with Toyota. One key difference between them is the UAW, which is endemic at GM but nonexistent at Toyota.

Here is a big problem: the government has little money of its own (other than what it prints). Instead, it subsidizes the “losers” by taxing the “winners”. In other words, it punishes success and rewards failure. As a result, the pool of winners is becoming smaller and, at this pace, will be dried out or chased away soon. Still wondering about my statement “America is becoming yesterday’s China”? Wonder not! Democracy, as we practice it today, looks more and more like communism (i.e. China under Mao or the former Soviet Union), and it is destroying America faster than any other forces!

By punishing success, you will end up without any success!

5. What is America, anyway?

Democracy is not a cornerstone for America at all! Capitalism is, and it’s the only one! In other words, capitalism is the foundation not only for America, but also for democracy, as illustrated below.

Furthermore, when democracy gets too big and too distorted, it will crush the foundation, resulting in a catastrophic collapse of America, as illustrated below.

6. What should we do?

We must do three things in principle:

1. We must clearly recognize that capitalism is the foundation of our country, with democracy being merely a nice-to-have option. Sacrificing capitalism for democracy, we will end up losing both.

2. Clearly accept a basic tenet of human nature: “me first”. Yes, it applies to politicians too! However, unlike capitalists who have no problem embracing “me first”, our politicians pretend to be “you first”. In reality, they are still just “me first”, for which they care about your vote, not necessarily you. Worse yet, they are willing to win your vote at any cost, even if it means destroying America by emptying her public treasury! Worse still, they can be easily and openly bribed. Just look at this example: 81 House members just enjoyed an all-expense paid hiatus in Israel.

3. Reform our political system (and social programs) to accommodate this basic tenet of human nature, not denying or defying it, as we do now!

Specifically, we must stick to capitalism and dramatically improve our democracy with one fundamental change: Term limits for the political offices, starting with the American Presidency: setting it to be one term (e.g. six years) and raising the statutory requirements! For more, read my book: “Saving America, Chinese Style”.

7. Applications

Let’s apply Pyramid Theory I to three recent hot topics:

1. Middle-out economics

2. Income inequality

3. The minimum wage

7.1 Middle-out economics

During the 2012 campaign, President Obama fashioned something called “middle-out economics”. What is it? The diagram below visually compares it with Pyramid Theory I.

As is easy to see, middle-out does not even follow physics (e.g. gravity). Therefore, it is either trivial (e.g. just a token shape) or unrealistic if it is presented as anything serious in life.

Here is my take: middle-out economics is unreal – it’s just politics for votes!

No matter how hard you try, you can’t ignore or circumvent physics! Pyramid Theory I has been proven for centuries while middle-out economics is just an impossible dream, or a political game!

7.2 Income inequality

Conceptually, income inequality is a good thing: It gives people more incentive to produce better results. In other words, income should be proportional to outcome. Because we are different in capabilities, we produce different outcomes. Our incomes should therefore be different.

How different should they be? A free market must decide!

If you have ever been a business owner or a corporate manager, you should know that your subordinates should be paid according to their abilities and outcomes. This applies not only to their base salaries, but also to any bonus. Otherwise, it’s communism!

Now, what do I have to say about this argument: Obama: Income inequality threatens American Dream? Here are my two earlier publications:

1. American Dreams: Oversold and Overbought! American Dreams should follow Pyramid Theory I, with the top performers realizing the best dreams!

2. Equality in America: Oversold and Overbought! There should be only two types of equality: equal justice and equal opportunities. Everything must be earned, following Pyramid Theory I!

7.3 The minimum wage

In theory, there should be no minimum wage in a free market economy – Let the market decide. Because we already have the minimum wage, it is difficult to backtrack it. However, as a principle, the direction of any minimum wage should follow the direction of the market wages. In other words, do not raise the minimum wage while the market wages are clearly going down, as it is now!

Now, what do I have to say about this argument: Obama: Raise minimum wage and extend unemployment? Clearly, these are ideas promulgated by a politician searching for votes at any price since both are detrimental to our country’s health. Unemployment benefits are not yet another long-term entitlement program!

8. Discussion

Pyramid Theory I is valid! It is similar to the Bell Curve that applies to almost everything in life, from the grades of all the students in a class, to the economic status of all the citizens in a country, to the economic status of all the countries in the world (read: Pyramid Theory II)!

Here is one simple pyramidal example most Americans can appreciate: In the 2013-2014 season, there were 30 teams in the NFL. Only 12 teams made it to the playoffs, resulting in one team being the Super-bowl champions!

We strive to be the champions and we cherish their success!

America is deeply in trouble. Many Americans are nostalgic about the past: they miss the good old days, without realizing that they were abnormal – America was an economic monopoly after WWII! As the emerging economies show up to pursue their own liberty and happiness, America simply does not know what to do!

Bluntly, America must re-learn to compete for ideas and jobs in the “normal” world!

Unfortunately, most American politicians just keep fooling around by addressing the symptoms only, without attempting any real diagnosis, let alone any real solution! As a result, America has been getting worse only, for the past decade, at least!

What, then, is the root cause for America’s ill? Democracy, as we practice it today!

What is socialism?

How is socialism sold in America? Everything is free!

9. Closing

America has been prosperous, mostly because of America’s free enterprise system, or simply capitalism. America has been in a steep decline, mostly because of democracy, as we practice it today.

Unless our political system is reformed, as I suggested, American democracy may not even outlast Soviet communism in longevity! For more, read: Longevity: American Democracy vs. Soviet Communism.

Always remember Pyramid Theory I! It will guide you in everything you do!